Your credit score might seem like just another number, but it plays an important role in your financial life. From getting approved for loans to securing favourable interest rates, a good score can save you money and open doors to many opportunities.
Even if you’re new to Canada or have never had credit before, there are steps you can take to build a strong credit profile. Applying for a small loan that accepts credit-building applicants can be a great starting point.
Now, if you have poor credit, work to improve your score as soon as possible. One way to do this is by consistently making small, on-time payments for bills, personal loans, or by using a secured credit card responsibly.
No matter where you are in your credit journey, understanding the factors that affect it and practicing responsible financial habits can help you in many ways. But, before we dive into what affects your credit, let’s first understand what a credit score is and why it matters.
Understanding Credit Scores
A credit score is a numerical representation of your creditworthiness, ranging from 300-900 in Canada. The higher your score, the more favourbly lenders view you. For example, a credit score of 750 or above is generally considered excellent, while a score below 600 may be seen as poor.
These scores are calculated based on several factors, including your payment history, credit utilization, length of credit history, types of credit used, and new credit inquiries. Each factor carries a different weight in determining your overall score.
Services like iCash credit health check help keep track of your standing, offering insights that help you understand and manage your financial health effectively. It’s a perfect way to stay aware of your credit status and take proactive steps to improve your financial stability.
Payment History
Your payment history is the most significant factor affecting your credit standing. This includes your record of on-time payments, late payments, defaults, and any missed payment. Lenders see consistent, timely payments as a sign of reliability.
Conversely, late payments and defaults can significantly lower your score. To build a positive credit history, pay all your bills on time. Setting up automatic payments or reminders can help ensure you never miss a due date.
You can also download helpful financial apps, like PocketGuard, to help track your bills and payments, making it easier to stay on top of your financial obligations. Additionally, if you have any outstanding debts, try to pay them off immediately.
Credit Utilization Ratio
Your credit utilization ratio is the balance-to-limit ratio on your credit cards. It measures how much of your available credit you’re using. Keeping this ratio below 30% can positively impact your score.
For example, if you have a credit limit of $5,000, try to keep your balance below $1,500. High utilization signals to lenders that you may be overextended financially, while a lower ratio shows responsible credit management.
Even if you pay off your balance in full each month, it’s still important to keep an eye on your credit utilization ratio. You can do this by regularly checking your credit card accounts and paying down balances before the statement closing date to keep your ratio low.
Length of Credit History
The length of time your accounts have been open also plays a role in your credit rating. Older accounts in good standing demonstrate long-term creditworthiness. Closing accounts with a lengthy track record can shorten your credit history and negatively affect your score.
It’s often beneficial to keep your oldest accounts open, even if you rarely use them. This helps build a longer, more stable credit history over time. Let’s say you have a credit card that you’ve had for 10 years and another for only one year. If you close the older account, your credit history will be reduced to just one year.
Of course, with any open credit account comes the responsibility to use them responsibly. Always keep balances low, avoid exceeding your credit limit, and pay off any debt on time.
Types of Credit Accounts
Having a diverse mix of credit accounts is another important factor. This includes credit cards, mortgages, rent payments in Canada, and car loans. A well-rounded profile demonstrates your ability to manage various types of credit responsibly.
If you only have credit cards, consider diversifying with temporary installment loans or another type of credit. This variety can make your credit file look stable and positively influence your score. But, only take new credit if you can manage it effectively.
Recent Credit Inquiries
Credit inquiries come in two forms: hard and soft. Hard inquiries occur when you apply for new credit and can temporarily lower your credit score. Multiple hard inquiries in a short period can indicate financial instability to lenders.
Soft inquiries, on the other hand, do not affect credit scores. These inquiries are usually performed by alternative financing providers when you apply for payday loans, primarily to verify your identity.
Always monitor your recent credit inquiries to ensure they are accurate and not harming your financial future. If you notice any unauthorized or incurred hard inquiries, dispute them with the credit bureaus immediately.
Debt Levels
Your total outstanding debt is another factor that affects your credit score. High debt levels can negatively negatively affect credit scores, as it suggests you might struggle to repay your debt.
To maintain healthy debt levels, prioritize paying down high-interest debts first. Strategies like the snowball method (focusing on smaller balances first) or the avalanche method (tackling high-interest debts first) can help reduce your overall debt burden effectively.
Once you’ve paid off the debt, avoid closing the account (as mentioned above) as it can also affect your score. Keeping a low balance and making timely payments on all debts is key to maintaining good financial health.
Credit Report Errors
You may not even know it, but there could be errors on your credit report that are negatively affecting your score. These errors can include incorrect personal information, accounts that don’t belong to you, or missed payments that were made on time.
To avoid these types of errors, it’s crucial to regularly review your credit reports from all the major credit bureaus: Equifax or TransUnion. If you spot an error make sure to dispute it with the appropriate bureau and provide any necessary documentation of proof.
To dispute an error, you can either do so online or by sending a letter to the credit bureau. The bureau then has 30 days to investigate and respond with their findings.
Public Records and Collections
Public records like bankruptcies, tax liens, and collections significantly impact your credit score. These records indicate severe financial difficulties and can stay on your credit report for six years after the date you’re discharged.
Recovering from these setbacks requires consistent, responsible financial behavior moving forward. Paying off any outstanding collections and avoiding future pitfalls will gradually help rebuild your credit.
Of course, you should avoid these situations altogether. But, if they do occur, take proactive steps to address them and minimize the damage to your credit report.
Achieving and Maintaining Strong Credit Health
Knowing the factors that affect your credit is the first step to maintaining good credit health. By regularly checking your report for errors, preventing missing payments, limiting hard credit inquiries, and avoiding negative marks like public records and collections, you can keep your score in a healthy range.
Remember to also practice responsible financial habits, such as keeping your credit utilization low and diversifying your credit mix. And, If you want to learn more about how credit scores work and their importance, credit educational resources are available through bureaus or financial institutions.
